Happy New Year

Happy new year to all those celebrating the start of the Year of the Tiger.

I will be celebrating the Year of the Tax Hike, which is due to start on 6 April.

Anyone with a better name, please share your wit and wisdom by emailing me or commenting on this post with suggestions. There is no prize (times are tight, you know) but you will benefit from the kudos that attaches to such things…

The year of the Tiger signifies bravery. The year of the Tax Hike signifies increases in tax for individuals with income over £150,000 and for trustees (whatever the trust’s income); and the gradual reduction in personal allowances for those with income over £100,000. And the year after, NICs will be increased by 1%.

What to do?

There are several ideas which can be utilised to reduce the impact of these changes. These can be summarised as follows:

Accelerate

Income (e.g. bonuses or dividends) which would otherwise have been paid in 2010 / 2011 might be brought forward to this year (i.e. before 6th April). You will still suffer tax but this simple step will give rise to tax of 40% rather than 50%. The employer will need to agree to this, since it will also need to pay PAYE and employers NICs earlier than possibly anticiapted. If your employment status is tenuous, don’t expect your employer to agree….

Defer

You may want to defer allowable expenditure and reliefs until next year. Alternatively defer might mean hold off on making payments out of companies until tax rates reduce. This is only suitable for owner managed businesses and will need to be kept under review.

Restructure

There are tax efficient structures which can be utilised to reduce overall rates of tax. These should only be undertaken with proper professional advice. Some of these are quite strightforward such as careful use of tax approved employee share incentives, e.g. EMI options. Another well trodden path is to address the balance between spouses, when one spouse or civil partner will be a 50% taxpayer and the other will pay tax at a lower rate. Income producing assets can generally be transferred between spouses with no capital gains tax or inheritance tax implications but often the income tax benefits are surpising.

Invest

The EIS and VCT schemes (possibly combined with pensions planning) can be used to reduce your effective rate of tax. This is only of use if you have cash to invest. Further, you will need to take proper investment advice to ensure that a particular investment is suitable for you. Note, some providers offer “protected” EIS and VCT investments with a lower risk profile.

Watch this site for some more ideas on how to beat the tax man and steps which should be considered before we usher in the new year.